Retailer Bankruptcies Making Headlines

Discussion
Apr 21, 2008

By George Anderson

Today’s retailing reality is that business is not good for many and for others it’s even worse. As a number of recent articles have pointed out, large numbers of retailers have been closing stores, laying off staff and otherwise looking to reduce expenses in light of the consumer pullback in purchases in recent months.

Many, including the Bombay Co., Domain, Fortunoff, Harvey Electronics, Hoop Holdings, Levitz, Lillian Vernon and Tweeter Home Entertainment, have found that cutbacks simply weren’t enough and chose bankruptcy, either for the purpose of reorganizing or liquidating a business.

“You have the makings of a wave of significant bankruptcies,” Al Koch of the corporate turnaround firm called AlixPartners recently told The New York Times.

“For years, no deal was too ugly to finance,” he said. “But now, nobody will throw money at these companies.”

Speculation had run rampant last week that another retailer, Linens ‘n Things, would soon be seeking bankruptcy protection. The retailer acknowledged missing a $16.1 million payment to its creditors and was said to be working with lenders to restructure its debt obligations.

According to the Bernard Sands Weekly Ratings Alert, some of Linens ‘n Things’ largest suppliers have cut off shipments to the company fearing that GE Finance may withhold the chain’s $700 million revolving line of credit.

Last Tuesday, Linen ‘n Things’ CEO Robert DiNicola issued a statement. “Despite the strides that LNT has made to improve the operational side of its business over the past two years, these measures have not produced acceptable financial results. The increasing deterioration of the credit markets and the residential real estate meltdown, both stemming from the turmoil in the subprime mortgage market, and the resulting downturn in consumer spending, especially in the home sector, have combined to create additional and acute financial challenges for the Company and the retail sector as a whole.”

One day later, the chain announced that it had retained Financo, an investment banking firm, to assist the company in evaluating various strategies for the company.

Mr. DiNicola said of the Financo hiring, “We are committed to exploring all reasonable avenues in our effort to strengthen the Company and to adopt a financial solution that recognizes the inherent value of the Linens ‘n Things’ business.”

Discussion Questions: What do you see as the primary causes behind the number of chains filing for bankruptcy? What lessons are there to be learned by other retailers so they can avoid a similar fate?

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20 Comments on "Retailer Bankruptcies Making Headlines"


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David Biernbaum
Guest
14 years 1 month ago

The economy will be blamed for the number of chains filing for bankruptcy; however, in my opinion the economic factors are simply the “straw.” There are many variables and factors but here are a few candidates:

• The product assortment and sku selection is basically exactly the same as one or more other chains so therefore price is the only differentiating factor;
• There are too many flaws in the chains supply and replenishment systems;
• Ineffective advertising campaigns or lack of;
• Promotions are no effective to drive new customers and new sales;
• Lack of imagination;
• Poor management of accounting, financing, and cash flow.

When the economy starts to make a downturn, these and other factors will play a role to determine how well the retail chain will survive. However, the retail chains that have a strong business plan, made adjustable for changing times, will survive and thrive in the years ahead.

Li McClelland
Guest
Li McClelland
14 years 1 month ago

I will not name names, but a number of retailers which are in trouble (and have been for a while for many of the reasons previously listed by fellow panelists) have stubbornly been avoiding reality. They have used untold energy to “spin” their problems to the press, to the financial analysts and to their own employees. What they have usually NOT done is replace upper management–an action that would have provided new eyes and ears, and might have actually saved the companies.

Mark Lilien
Guest
14 years 1 month ago

American retailing has always been highly leveraged, because the locations and fixtures can be leased, and the merchandise is often paid on terms. Many great retail companies go Chapter 11 and emerge successfully (Macy’s and the former owner of Toy R Us, Interstate Stores, both went Chapter 11 years ago).

It’s easy to blame the economy, but even when retailing is strong, bankruptcies occur. Often it’s just an accident of history, based upon the financing. If you’re highly leveraged, but have no debt coming due, you can lose money for a long time if you start with enough cash. If you own your locations, you may be able to mortgage them. If you have enough cheap leases, survival is often just a function of cost cuts.

When retailers close stores, the remaining businesses can get stronger. The biggest problem: closed locations are often taken by other retailers. Too bad bankruptcies don’t lead to demolitions.

Pamela Tournier
Guest
Pamela Tournier
14 years 1 month ago

Ray Jones got it right — the root problem goes well beyond management of an individual store and extends to the horrific mismanagement of the U.S. economy, wild lending and a bubble economy focused, for the past 5 years or so, on housing. Now it’s time to pay the piper, only this time the U.S. consumer — and many institutions, including not only retailers but some of the most august names in banking — are functionally bankrupt. Unlike Bear Stearns, the Fed’s not about to bail out Linens ‘n Things.

That said, those who said that L&T management has done an execrable job of listening to the consumer and differentiating by ‘marketing to the differences’ are right again, in spades. But economic signs suggest this will be more than the usual Darwinian struggle. The eventual winners may look more like what survived AFTER the comet hit … small, nimble, not bloated by layers of management, legacy thinking and practices. The better to hear the voice of the consumer.

Ted Hurlbut
Guest
Ted Hurlbut
14 years 1 month ago

The causes of retail failure have been well-noted above: too little differentiation; too much focus on driving sales at the expense of margin, poor execution in managing inventories and the supply chain. The segment leaders, the survivors, are the leaders for a reason.

As category after category becomes rationalized, with economies of scale driving margins lower and lower, the opportunity for growth is with smaller, highly differentiated niche retailers whose value proposition is built around cachet, premium quality and exceptional service.

Lee Peterson
Guest
14 years 1 month ago

I agree with my fellow panelists above: it’s survival of the fittest and guess what? A lot of retailers, we’re discovering, aren’t very fit at all. It also seems that over-expansion got the better of them over the last 20 years…perhaps a little too irrationally exuberant, to quote the ex-head of the Fed.

One side note though: so what’s next? When huge marginally relevant concepts, like Macy’s, Penney’s, Sears and Gap start to ‘shake down’ (stop spending cap ex, reducing inventories and closing stores), who fills those slots for consumers?

Is it all Wal-Mart’s for the taking? Target?

I’d like to hear us discuss that: what does the future of retail hold after this meltdown? (Think small.)

Cathy Hotka
Guest
14 years 1 month ago

Everyone’s right. And when oil is $117 per barrel nothing is going to go right.

Expect a lot of consumers to sit on their hands and make do with the sheets and lamps and sneakers they have while waiting for the economy to snap back. I expect no real progress until after the election, when Americans know who their new leader will be. Until then, when faced with 3-pound packages of hamburger that retail for $17.50, they’ll make do with macaroni instead, and will feel good about the frugality. Retail formats that do well when homes are selling briskly, or when customers are feeling “splurgy,” aren’t going to do well this year.

Kai Clarke
Guest
14 years 1 month ago

Retail success is built upon great customer service (why doesn’t every one have greeters at their store front doors?), great logistic management (like Wal-Mart, Home Depot and Dell) and current aggressive product offerings that embrace the 4Ps (product, price, place and promotion). The top retailers in the world all have this in-place (Wal-Mart, Home Depot, Kroger, Target, Costco, Walgreens, etc.) and are working on improving their current models to make them more efficient, while offering better offerings that are stronger category leaders at each of their stores. Their models embrace a dynamic approach to customer service improvement, world-class logistics and replenishment, and a product positioning statement that is aggressive, yet profitable.

Craig Sundstrom
Guest
14 years 1 month ago

I’ve yet to see any hard numbers that bankruptcies are higher than “normal” – an anecdotal list of has-beens notwithstanding. I am willing to make the jump that at some point in the future (between this afternoon and eternity) we will see such an increase….but what of it ? Isn’t that what happens in downturns?

To be sure, there will always be some companies that perform better than others, whether because of chance, management, fixed costs, etc. Whether the economy as a whole is doing well or poorly won’t change this simple fact that there is a distribution, however, it DOES determine whether or not someone in the tail end of this distribution can remain viable.

Mel Kleiman
Guest
14 years 1 month ago

As I read this item, three quick quotes came to mind.

“The squirrels know that winter will always come.”

“There are three types of change; Situational, Cyclical, and Structural.”

“The system always gives you 100% of what the system is designed to give you.”

If you realize that all three quotes are always true then the cause of all of the bankruptcy in retailing falls on Management.

Camille P. Schuster, Ph.D.
Guest
14 years 1 month ago

Being a “me-too” store is relatively easy: assortment can be similar to other stores, you can appeal to many consumers, you don’t have to make hard decisions to appeal to one group and risk offending anyone else. However, your store has no differentiating factor either. You can compete on low price until someone else offers a lower price. At some point you also have to make some money.

Without a differentiating factor, without a loyal consumer following, without constant vigilance of consumers, you will lose your consumer base. When you can no longer lower prices or make a profit with a “me-too” store, the doors will close. The bad economy only accelerates the process.

Paula Rosenblum
Guest
14 years 1 month ago

I think the first four comments have nailed the problem exactly right.

We are experiencing a “thinning of the herd.” The US has been over-retailed for well over a decade and everyone knew it. Now, those retailers who were on the bubble are feeling a serious pinch.

Smarter retailers cut back on inventories in anticipation of the down economy. Comps may be down, but EPS is pretty solid, and margins are still up.

Is that bad vs. good management? I think it’s just Darwinian. Our data suggests that the best retailers have hunkered down and are preparing for a re-emergence in 2009.

By the way, Chapter 11 can be a good thing, if you can get rid of bad leases and locations, but I will say this, if Linens ‘n Things really thinks its problem is due to a down housing market, then management really doesn’t understand the business. Furniture, sure…but sheets? Come on.

W. Frank Dell II, CMC
Guest
14 years 1 month ago

This time around is no different than the last one. Too many non-food retailers only make money in November & December, while losing money the rest of the year. Two bad Christmas holiday seasons kills the company. Non-food retailers must learn from Wal-Mart and supermarkets to make money every week and more at the holidays.

Another contributing fact is a large gross margin covers a multiple of inefficient operations. Open-to-buy coupled with “I don’t care what it costs to get it into the store” is a recipe for failure.

The third contributing factor is consumers change and many retailers do not. For years we have been preaching that the mass market is dead. Too many food retailers have been slow to identify a target market and build a business around them. Those that have not changed have departed, or will be departing.

Anne Howe
Guest
14 years 1 month ago

One of the key lessons to be learned over and over in retail is to stay connected to the shoppers and to act on what you hear. How many retailers in trouble today actually take the time to listen to shoppers who no longer visit the stores? The traffic doesn’t just stop overnight…sales declines start slowly. I would suggest that most shoppers will tell retail executives all kinds of important things they really need to hear, if asked.

This does not imply there is only one cause, it is put forth to shed light on the shopper and her potential positive impact on the business model!

Raymond D. Jones
Guest
Raymond D. Jones
14 years 1 month ago

When I was in business school, they taught us that leverage is key to accelerating profits. Make money from borrowed money!

Some people forgot this also happens in reverse. You can lose money more rapidly when you are over leveraged.

Retailers are famous for borrowing to expand stores, expand inventories, and expand sales. The problem comes when this does not lead to expanded profits, but you still have to pay the piper.

We are clearly in a contracting economy and retailers are the first line of impact when consumer spending slows. To a great extent, many retailers are paying now for the over-leveraged growth of the past.

Max Goldberg
Guest
14 years 1 month ago

When the economy is good a myriad of small mistakes can easily be covered up. A poor economy exposes and exacerbates those flaws. It’s management’s responsibility to be prepared for an economic downturn, just as it is its responsibility to maximize upside potential in a growing economy. Whether it is product selection, marketing, competitive pricing or customer service, all responsibility rests with management.

Dick Seesel
Guest
14 years 1 month ago

If you accept a Darwinian theory of retailing, the current shakeout is demonstrating “survival of the fittest.” In this case, the fittest retailers are the ones who are best suited to survive the slowdown in spending and the tightening of credit markets, even if their comp sales and earnings take a short-term hit. The survivors are the ones with the most consistent strategy, the best ability to execute, and the most relevance to consumers. The current macroeconomic climate probably just hastened the demise of the others.

David Livingston
Guest
14 years 1 month ago

The primary reason for bankruptcy is poor management, a business model that is outdated, and an over-stored marketplace. A weaker economy is no excuse, since a weak economy often is where new products and services are born.

There really should be no concern over the bankruptcies since for the most part, they were inevitable. Generally, companies that file for bankruptcy don’t like to accept the blame for their own failure, so they will often look for excuses like the economy or government policy.

Lisa Acosta
Guest
Lisa Acosta
14 years 1 month ago

I think the key issue is that customers are not spending money like they used to. Housing, jobs, gas, stagflation, etc are all to blame, but the bottom line is that money is tight for us all. Good cash flow can cover up a multitude of mismanagement sins, but poor cash flow causes a business to make some tough decisions in order to survive.

With sales down 50% in the past 6 months I have been forced to down-size my store’s square footage, cut staff hours, cull inventory, tweak prices, cut store hours of operation, while increasing promotions and marketing efforts, and it feels great! I have learned to run my business so much leaner. Sales are way down compared to last year, but so are expenses now. It’s a stressful time, but a hopeful one as well.

William Passodelis
Guest
14 years 1 month ago

All Great posts on this topic. The economy and credit is so difficult now that poor management will be punished and stores in difficult situations will not be able to get by–and the heard will be thinned. How many times in the past has this happened? Countless.

I also, unfortunately, believe the situation is going to get a whole lot worse and we will likely lose a number of stores and brands through poor management and poor planning, either from the downturn, or from an inability to plan for the economic difficulties that are occurring. This is also cyclical and we are entering a very difficult time–the cost of oil has no ceiling, the dollar is losing value and if we are struck with worsening inflation, or stagflation, then the roller coaster ride will be no fun indeed.

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